Here Are Some of the Most Important Small-Business Tax Law Changes Coming Your Way

This piece was written for Frontier Business Edge by the tax experts at TaxBuzz.

The Protecting Americans from Tax Hikes (PATH) Act extended or made permanent several tax provisions that are favorable to businesses when filing their 2016 returns. To help the IRS combat tax filing fraud the act also modified several filing due dates for business returns and certain informational returns placing additional filing pressure on employers.

Here is a summary of those changes to make business owners aware the changes and potential benefits and earlier filing due dates.

Bonus Depreciation—Bonus depreciation is extended through 2019, providing an allowance for first-year depreciation of 50% of the cost of qualifying business assets placed in service through 2017. After 2017, the bonus depreciation will be phased out by allowing a 40% bonus in 2018 and 30% in 2019. After 2017, the bonus depreciation will no longer apply. Qualifying business assets generally include personal tangible property other than real property with a depreciable life of 20 years or fewer, although there are some special exceptions that include qualified leasehold property. Generally, qualified leasehold improvements include interior improvements to non-residential property made after the building was originally placed in service, but expenditures attributable to the enlargement of the building, any elevator or escalator, and the internal structural framework of the building do not qualify.

In addition, the bonus depreciation will apply to certain trees, vines, and plants bearing fruits and nuts that are planted or grafted before January 1, 2020.

Vehicle Depreciation—The first-year depreciation for cars and light trucks used in business is limited by the so-called luxury-auto rules that apply to highway vehicles with an unloaded gross weight of 6,000 pounds or less. The first-year depreciation amounts for cars and small trucks change slightly from time to time; they are currently set at $3,160 for cars and $3,560 for light trucks. However, a taxpayer can elect to apply the bonus-depreciation amounts to these amounts.  The bonus-depreciation addition to the luxury-auto limits is $8,000 through 2017, after which it will be phased out by dropping it to $6,400 in 2018 and $4,800 in 2019. After 2019, the bonus deprecation will no longer apply.

Section 179 Expensing—The Internal Revenue Code Section 179 allows businesses to expense—rather than depreciate—personal tangible property other than buildings or their structural components used in trade or business in the year the property is placed into business service. The annual limit is inflation-adjusted, and for 2017, that limit is $510,000. Where a business places large amounts of property qualifying for Section 179 expensing into service during the year the $510,000 limit is reduced by one dollar for each dollar that the total cost of such property exceeds $2,030,000 for 2017.  This is referred to as the investment limit and it is also inflation adjusted from year to year.

In addition to personal tangible property, the following are included in the definition of qualifying property for purposes of Sec. 179 expensing:

• Off-the-Shelf Computer Software
• Qualified Real Property—The term “qualified real property” means property acquired by purchase for use in the active conduct of a trade or business, which is normally depreciated and is generally not property used for lodging except for hotels or motels. Qualified retail property includes the following:

o Qualified leasehold improvement property

o Qualified restaurant property

o Qualified retail improvement property

New Filing Due Dates—There are some big changes with regard to filing due dates for a variety of returns. Many of these changes have been made to combat tax-filing fraud. The new due dates are effective for tax years beginning after December 31, 2015. That means the returns coming due in 2017.

Partnerships

• Calendar Year Due Date: The due date for 1065 returns for the 2016 calendar year will be March 15, 2017 (the previous due date was April 15).
• Fiscal Year Due Date: Due the 15^th day of the 3^rd month after the close of the year.
• Extension: 6 months (September 15 for calendar-year partnerships).

S Corporations

• Calendar Year Due Date: The due date for 1120-S returns for the 2016 calendar year will be March 15, 2017 (unchanged).
• Fiscal Year Due Date: Due the 15^th day of the 3^rd month after the close of the year.
• Extension: 6 months (September 15 for calendar-year S Corps).

C Corporations  

• Calendar Year Due Date: The due date for 1120 returns for the 2016 calendar year will be April 18, 2017 (the previous due date was March 15). Normally, calendar-year returns will be due on April 15, but because of the Emancipation Day holiday, the 2017 due date is April 18.
• Fiscal Year Due Date: Due the 15th day of the 4th month after the close of the year, a month later than in the past. However this change will not apply returns with a fiscal year ending June 30 until 2026.
• Extension: 6 months (September 15 for a Form 1120 for a calendar-year C Corp). Exceptions to this extension include the following: (1) 5 months for any calendar-year C corporation beginning before January 1, 2026 and (2) 7 months for June 30 year-end C corps through 2025.

W-2s, W-3s, and 1099-MISC reporting non-employee compensation—In an effort to combat rampant filing fraud and to allow time to match actual filed W-2s with e-filed tax returns, the IRS is doing two things for the upcoming tax season. First, it is delaying issuance of refunds for certain returns with refundable credits. Second, it is requiring employers to file information earlier.

• Due Date: For 2016 W-2, W-3, and 1099-MISC reporting non-employee compensation, the due date for filing the government’s copy is January 31, 2017 (the previous due date was February 28). The due date to the employee or independent contractor remains January 31.

Work Opportunity Tax Credit (WOTC)—The WOTC provides Employers with an opportunity to claim a tax credit for hiring workers from targeted groups.  The credit is a percentage of the employee’s first-year wages and the first year is the 12-month period beginning on the date the employee begins work for the employer.

This credit originally sunset in 2014, but the PATH Act retroactively extended the credit for five years, through 2019.

• Generally, the credit is 40% of first-year wages (not exceeding $6,000), for a maximum credit of $2,400 (0.4 x $6,000).
• The credit is reduced to 25% for employees who have completed at least 120 hours but fewer than 400 hours of service for the employer. No credit is allowed for an employee who has worked fewer than 120 hours.
• The legislation also added qualified long-term unemployment recipients to the list of targeted groups (IRC Sec. 51(d)(1)(J)), effective for employees beginning work after December 31, 2015.

Research Credit—After twenty-one consecutive years of extending the research credit year by year, the PATH Act has now made it permanent. The act also made the following modifications to the research credit:

• For years after December 31, 2015, businesses, with an average of $50 million or less in gross receipts in the prior three years, can claim the credit against the alternative minimum tax (PATH Act Sec. 121(b)).
• For years after December 31, 2015, businesses, with less than $5 million in gross receipts for the year of the credit and no gross receipts in the prior five years, can claim up to $250,000 per year of the credit against their employer FICA tax liability (PATH Act Sec. 121(c)). Effectively, this provision is for start-ups.

What Is in the Future?

With the election of a Republican president and with a Republican majority in both the House and Senate, we can expect to see significant tax changes in the near future. President-elect Trump has indicated that he would like to see the Sec. 179 limit significantly increased and the top corporate rate dropped to 15%. Watch for future legislation once he takes office. For further tax news follow TaxBuzz’s tax blog.